Roku, Inc. (ROKU - Free Report) recently announced that it will soon venture into premium subscriptions business by enabling pay-TV subscriptions through The Roku Channel — its television and movie streaming service.
This new offering will allow users to subscribe to more than 25 paid premium content, like CBS' Showtime, Lionsgate's Starz and MGM Studios' Epix. Notably, users will be able to go through the available movies and TV shows before they choose to subscribe.
More importantly, the payment process is quite user friendly, as the subscription bill for all the Roku services are to be paid through only one bill instead of separate bills for each service.
A Possible Boost for Platform Revenues
Roku’s Platform business brings more than half of the company’s overall revenues. In the last reported quarter, revenues from this segment formed 58% of total revenues. The platform business is mainly driven by the advertising segment.
With the new service, Roku aims to expand ad reach by enabling media partners to include ad content within the Roku app instead of including it in separate apps.
Additionally, the new premium channel offerings are likely to boost the video advertising segment if the company chooses to deliver them on the premium channels. Video advertising, revenues from which doubled year over year in the last reported quarter, play full screen on the platform and are not skippable in most channels, making it lucrative for advertisers. Moreover, the company sells branded sponsorships on the Roku Channel. As revenues from branded sponsorships form part of Roku’s ad revenues, the new offering is likely to boost this revenue stream.
Further, the ramping up of ad sales with the addition of premium channels will help sustain the strong momentum of average revenue per user (ARPU), which Roku calculates as the ratio of platform revenues to active accounts. The number of active user accounts at the end of the third-quarter 2018 was an impressive 24 million.
Move to Gain Competitive Edge
Notably, Amazon (AMZN - Free Report) also offers third-party premium channels on its Prime Video platform. However, subscribers of premium channels through Amazon can access the third-party services directly whereas subscribers through Roku require the Roku app to access these channels, which might be a little cumbersome for users.
While Roku’s move can be directly related to Amazon’s offerings, there are talks of other companies, which may come up with similar services soon.
Facebook (FB - Free Report) may offer paid content from channels like HBO for its Facebook Watch users, even though there is no confirmation on this matter.
In October last year, Apple (AAPL - Free Report) was reported to be planning to include its free original content along with subscription channels within the TV app available on iPhones and iPads.
Despite a few challenges, Roku is positioned well to gain from venturing into the premium content selling business, which will earn it a 20% commission from each subscription.
Roku currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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